How GST is killing small businesses with inspector raj and suffocating compliance
The introduction of the Goods and Services Tax or GST was supposed to create a unified market of 1.4 billion people and encourage entrepreneurship and job creation. The other aim was to bring more and more firms into the formal sector of India’s economy, which will help expand the tax base needed to raise the country’s tax-to-GDP ratio that has been hovering around 10-11 per cent for a long time.
However, multiple rates and never-ending filing and reporting requirements have turned the GST regime against smaller businesses and first-time entrepreneurs. No wonder, out of 6.3 crore enterprises (the latest available data from NSSO 2015-16), only 1.34 crore have joined the GST network. There is no official data on how many firms have cancelled their GST registrations. But anecdotal evidence suggests that an increasing number of small businesses are either de-registering, and/or trying to remain small by not letting their sales turnover increase the threshold of Rs 20 lakh for services firms and Rs 40 lakh for manufacturing entities, above which GST registration is mandatory.
The current discourse on GST is mostly about how unscrupulous elements are using fake invoices to claim more input tax credits (ITC) than they should. That’s true. However, the major reason for that is too many rates and wide gaps between rates (0-28 per cent) for different inputs that facilitate over-claim of ITC. For instance, cement attracts 28 per cent GST while steel bars 18 per cent. Obviously, real estate firms will use more cement (on paper) than steel to claim more ITC than they should. The solution is to cut multiple rates into fewer ones and reduce the rate differentials. However, the regulators responded by dis-allowing input tax credit for real estate players, which defeats the purpose to check cascading effects of tax on tax.
What is not getting serious attention but should is how suffocating compliance burden and unchecked inspector raj are discouraging smaller business entities and first-time entrepreneurs from turning formal by joining the GST network.
But GST inspectors (many of them have seen the good old days of sales tax and VAT, and obviously don’t want to let go of their power to extract bribes) harass such firms on flimsy grounds like ‘why don’t you have a company’s nameplate clearly displayed’ that can create nuisance in residential areas. That is quite stupid at a time when the difference between home and office has blurred. Moreover, this runs counter to the contributory role played by RoC and discourages entrepreneurship and creation of knowledge-intensive well-paying jobs that India badly needs, the more the better.
Of late, small business entities are getting automated GST notices based on their bank statements and being asked to furnish documents that are easily available with the government, for instance, tax returns or audited balance sheets.
The registered office of a company I deal with is Noida, but its bank branch is in Dehradun where the directors of the company live. All tax returns are filed properly. As the company has 100 per cent export sales, there’s no GST payment obligation, and yet it has got a notice from the GST Dehradun office simply because the company’s bank branch is in Dehradun. Unlike large corporations, small business entities can’t really afford to have full-time “government affairs” teams to navigate the opaque tax bureaucracy and struggle to deal with it.
Source form - https://theprint.in/opinion/how-gst-is-killing-small-businesses-with-inspector-raj-and-suffocating-compliance/861816/
